Rhapsody blasts Apple's 30% cut from in-app subs

Music streaming service Rhapsody today blasted Apple's decision to take a 30 per cent cut of all in-app subscription and content revenues, saying that the move makes its iPhone business model unsustainable.

The Seattle-based company was the first to publicly express its displeasure with Apple's announced rules changes, which not only spelled out the 30 per cent revenue cut, but also require content sellers to delete links to outside-app sales sites , and offer the same or lower prices for in-app purchases as they do for subscriptions or content bought elsewhere.

In a statement yesterday, Jon Irwin, Rhapsody's president, called Apple's subscription plan "economically untenable." He elaborated on that in an interview today.

"We have to pay rights holders, the music labels and publishers, for our content," said Irwin. "With all those fees that go out, [adding] Apple's 30 per cent will exceed the revenue on our product. It's not a matter of making less money, it would be zero profit."

Although Rhapsody could continue to rely on its current business model -- it doesn't solicit subscriptions within its iPhone app, but instead adds members through its own Web site -- Irwin said that the one-click purchase proposed for in-app subs gives Apple a big edge with customers.

"If, as a result of our marketing, a customer finds our app, then uses the single-click sign-up option within the app, Apple gets 30 per cent. That's what simply doesn't make sense," said Irwin.

"Our position isn't that Apple doesn't deserve a take, they provide a valuable service [with the App Store], but there's a fair value that they should receive for that," Irwin continued. "What's under discussion here is how much that is."

Irwin declined to specify a percentage that Rhapsody would accept, but when asked about Google One Pass, the Android-makers just-announced subscription payment model, Irwin said, "That's a lot better than 30 per cent. That's sustainable for us."

Google has not announced how much it would take off the top for in-app subscription purchases, but several sources, including the Wall Street Journal, have said Google's commission will be 10 per cent .

Currently, Irwin said that Rhapsody pays between 2.5 per cent and 3.5 per cent in credit card transaction fees when it bills subscribers monthly.

Irwin seemed to applaud Apple's one-click, in-app subscription model, but continued to hammer on the impracticality of the size of the pie piece the Cupertino, Calif. company is demanding.

"The one-click sign-up is the value the App Store is bringing, but content and app providers are what adds value to the iPhone and iPad," Irwin said. "It's a cooperative relationship. But the content and Apple's distribution channel costs have to be less than we sell the product for. So the question is, 'How can we work together?'"

Irwin wouldn't comment on whether Rhapsody is thinking about pulling its iPhone and iPad apps from the App Store, and declined to comment on whether he thought Apple was changing the rules in the middle of the game.

Rhapsody launched its iPhone app in September 2009, and updated it in April 2010 to let subscribers listen to their playlists when the smartphone isn't connected to a Wi-Fi or cellular network. Although the app isn't designed for the iPad's larger screen, it also runs on Apple's tablet as well as on the iPod Touch.

In his statement yesterday, Irwin also said, "We will be collaborating with our market peers in determining an appropriate legal and business response to this latest development," a comment that some interpreted as threatening to sue Apple.

Today Irwin refused to comment further on possible legal action. "But I'm responsible for delivering value to shareholders, so I need to look at all options," he said.

He has been in contact with other subscription music services, including U.K.-based Spotify, to discuss a response to Apple's new rules, Irwin confirmed. "Every one of us is in the same boat," he said.

Irwin also said that he hopes to have more discussions with Apple or even the music labels, about their fees. "We want our customers to access their music wherever they want, whenever they want," Irwin said. "But Apple's new rules make it very difficult, no, unmanageable to do business."

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